Aligning with investor ESG needs: Roadmap for listed companies

The launch of the “Comply or Explain” sustainability reporting guidelines by the Singapore Exchange (SGX) earlier this year has created a significant buzz among the locally listed companies. Concerns on what the entire process entails, the resources required and what kind of effects it would have on organisational performance.

With that in mind, the Global Compact Network Singapore (GCNS), together with the support of SGX and the Singapore Institute of Directors, organised the first of its Sustainability Reporting Seminars. This seminar series aims to familiarise listed companies with the rationale behind the new guidelines, why they should take the opportunity to go beyond a box ticking exercise for their sustainability reporting work and what is the business case to do so.

ESG panelistPanellists from L - R: Steve Okun, KKR Singapore, Arisa Kishigami, FTSE Russell Asia Pacific and Wilson Ang, Global Compact Network Singapore

At this first event, representatives from FTSE Russell, a global indices leader and the engine behind the FTSE4Good Index, and KKR Singapore, a private equity firm with a wealth of experience financing companies that have good sustainability practices, were invited to share more about how companies can align themselves with the growing ESG (Environment, Social & Corporate Governance) needs of investors.

Ms Arisa Kishigami, Head of ESG, Asia Pacific, FTSE Russell provided an overview of the current landscape of ESG investing globally, and the key drivers that have resulted in an increased interest of investors in companies’ ESG performance. These include the recent changing regulatory perceptions of ESG and Climate Change & Carbon Investment Risks (i.e. Paris Climate Agreement).

She shared that investors’ approach to ESG is diverse, which mirrors the heterogeneous nature of the investors’ community. It is currently led by key assets owners globally and based on the priorities that will best suit their respective needs. Therefore, civil society plays a critical role in influencing and shaping investors’ interest and culture. At present, the practice for investors when it comes to putting finances behind ESG begins with a strong set of beliefs about the basic principles that they want to be aligned with. Thereafter, they will look into measuring and understanding what the ESG exposures for the investment portfolio are and finally, further engagement with companies to better understand how they manage these issues will facilitate investors to make more informed decisions.

She noted that in Asia, the culture on the level of disclosure by listed companies is usually lower than what is actually being done or required in comparison to other more affluent regions. While this may at times serve the purpose of local investors, but it is inadequate for international or foreign investors.

At FTSE Russell, ESG can be divided into two parts. First is on the risk management side of things, whereas the second is on the business opportunities. And the recommendation to approach a successful ESG would be first to manage potential operational ESG risks exposures, and second would be to redefine the industry and its business opportunities in a low carbon economy.

Addressing companies present at the venue, she stated that FTSE Russell and other Global ESG Evaluations want to help companies to prioritise their ESG issues and addressing them by highlighting what is good and what is lacking through their own process of selection and alignment with various international standards. The analysts do this through public based information and without subjective opinions.

It was highlighted as well that these international standards are not applied exactly the same across all companies largely because companies that are involved in different sectors, corporate structure and geography may be exposed differently to ESG issues. Therefore, when assessing companies, different themes are prioritised based on the respective characteristics of each company. Take for example; industrial companies are highly exposed to health and safety issues, which do not apply to a standard financial services company. Financial services companies also do not have to address environmental supply chain matters since there is no direct impact. Therefore, all companies will know what the analysts have found in the public domain.

Highlighting the importance of materiality in sustainability reporting is Mr Steve Okun, who is the Director of Public Affairs in Asia Pacific at KKR Singapore a private equity firm. He provided the investors’ perspective and shared that there isn’t a single list of issues that is used to assess companies. From KKRs perspective, in addition to materiality being applied, companies they invest in are assessed on other risk and opportunity factors. He stated that there were some risks that KKR as investors would not be willing to take.

At KKR, material risks and opportunities are assessed and addressed in two stages – First, at the pre-investment stage and second, where expectations are set and portfolio companies are partnered with. KKR chooses to invest in companies with a core product or service that provides a measurable solution to an ESG-related societal challenge. The companies they invest in must help address certain global challenges and with a business model that is financially viable. One such example is their investment in an Indonesia start up, “Go-Jek”, that transfer people from an informal economy to a formal one in its country. As an organisation, they firmly believe that addressing ESG challenges and financial returns can and must go hand in hand.

The question and answer session were very engaging as attendees sought clarifications from the speakers on a range of questions, which includes; how are businesses with high ESG risks but which also yield high returns perceived by investors? What is the balance between risk-minimisation and opportunities? Is there a trend on due diligence for ESG? What’s more important for investors – risks or opportunities? How can companies make it easier for investors to pick up relevant information?

Through the discussion, what was clear is that increasingly, enlightened investors will look into a company based on how it performs both on their financials and ESG issues. While both risks and opportunities are equally important, a 20-80 risk to opportunity rule generally can be applied as companies tend to understand risks quite well. Whereas it is the opportunities that companies find difficult to valuate and therefore, more time will be spent on it. With investors looking at performance on ESG indices strategically, how a company communicates on these will be one of the key-determining factor for their final decision to invest. Therefore, a well-researched and written sustainability report, in addition to an annual financial report, can be a game changer as it serves as quick preview for investors on a company’s ESG focus and progress. 

The event was well attended with several more listed companies on the waitlist. The feedback was positive by those who attended. We are encouraged by the affirmation that such short seminars will enable companies try to go for systemic change towards integrating ESG in its business strategy. Therefore, GCNS will be rolling out a series of similar seminars in the coming year to continue serving the interested of the Singapore listed companies and the larger business community.

Some highlights of the Questions & Answers

Q: When you look into investment, is there a min amount of capitalization?

Steve: We have threshold numbers but we are really more concerned on willingness to recognise ESG will become more important and potential in partnering than size.

Q: Do you look at gender numbers? How do you analyse those numbers? Does it make a difference?

Arisa: We do look at how companies are concerned about diversity – not discriminating. Not in terms of numbers of women/men. The only part where numbers are looked at is at the board – diversity of board, number of women, what percentage to take a one measure of the diversity report.

Steve: It’s become more important – KKR thinks that diversity is important if you want to be a better business – not 50-50 but diverse. It’s not just gender diversity. KKR has instituted that when women have children, they pay the mum, nanny and baby to go on business trips on the first year. Inherent bias training – people like and hire people most like them. They don't have quotas and tracking. They’ll start working with companies on that over time as well.

Q: How to break away from the old CSR perspective?

Steve: For ESG, there is a need to measure the financial return. This gets more buy-in from the business and they recognise this is something that will help them. If you can show you are helping their pnl, that’s what is going to get that buy-in. How much have your business profited from investors because you have implemented ESG measures?

Arisa: Environmental/CSR and investment sides should interact.

Q: The agenda should not be a matter of compliance but to drive long-term value. Both referred to aspects of risk-minimisation and opportunities for growth. What is the balance between these two?

Steve: The risk side takes care of itself. It’s the opportunity side that we spend a lot more time on – we rely on different partners to help with that. 20-80 risk to opportunity in part because people understand the risk already. The difficult part on opportunity is measuring the value – that's where you have to bring in the fact that this is good for the business.

Q: What are the signals you use to consider if something is material?

Steve: Investment horizon is 5-7 years but it doesn't make analysing 5-7 years. When we invest in a company, and they haven’t done any training, they’ll ask the company to go for that training and they’ll invest.

Arisa: Our time horizon is linked more to which themes are relevant to their clients. E.g tax transparency was raised 8 years ago but they didn’t develop it for a while.

Q: Disconnect between what is out there and picked up by investors. How can companies make it better for investors to pick up information?

Arisa: E.g. if the index identifies high risk for A, and nothing for B, you can use this to your advantage to think strategically.

Steve: When you have your annual report, that’s going to the investment community. Do a stand-alone sustainability report.

Q: There are some businesses that traditionally have high ESG risks due to locations, nature of business. However they provide good long-term returns. Would you consider the ability of the board in reducing the risk or just look at the performance?

Steve: It’s how do you improve your company in terms of financials and ESG perspective. KKR has worked with many companies to help them become better.

Q: Is there a trend on due diligence for ESG?

Steve: Yes no question on growing trend. You will have to start thinking about it at a corporate level. More and more firms are doing the type of ESG work. It’s here to stay

Q: There are many indexes. How should companies choose which to use?

Arisa: There are many key asset owners who use customised indexes. It is more important to focus on base data and use FTSE as a reference point to decide what to promote.

Q: For investors, is risk or opportunity more important?

Steve: Both are important in different ways.

Arisa: Both are important.